> Don't forget that the investment bank buys a portion of the IPO for themselves that they sell off later. I think you may be misunderstanding the "green shoe

> Don't forget that the investment bank buys a portion of the IPO for themselves that they sell off later. I think you may be misunderstanding the "green shoe option": http://www.investopedia.com/articles/optioninvestor/08/greenshoe-option-ipo.asp http://www.investopedia.com/articles/optioninvestor/08/green.... The underwriting bank sells short some shares to investors at the IPO price before it starts publicly trading, and has the option to buy back those shares from the issuing company at (a small discount to) the IPO price. If the price goes up after opening, then they buy and sell those shares at (nearly) the same price, so they only make money by making 7% of a larger number. If the price goes down after opening, they can buy shares on the open market at a price less than the IPO price, and keep 100% of those profits. For example, the banks underwriting the Facebook IPO made $100m because of the price drop (http://blogs.wsj.com/deals/2012/05/23/morgan-stanley-other-underwriters-make-100-million-profit-on-facebook-ipo/ http://blogs.wsj.com/deals/2012/05/23/morgan-stanley-other-u...). I also think that this particular agency problem is not as bad as you think. Investment banks typically determine compensation as some (mostly-)fixed percentage of revenue, so the investment banker should expect his pay to be pretty close to proportional to the amount of money he makes for the bank. This is even more true for the people near the top who are making the final decisions about where the IPO will price. I totally agree that the process could be improved, and that a 60% first-day return is too high, but I don't think it's prima facie evidence of corrupt dealings by the underwriters.